Is Tri Ocean Textile (TPE:1472) Weighed On By Its Debt Load?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Tri Ocean Textile Co., Ltd. (TPE:1472) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Tri Ocean Textile

What Is Tri Ocean Textile's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Tri Ocean Textile had NT$835.3m of debt, an increase on NT$761.9m, over one year. However, because it has a cash reserve of NT$183.6m, its net debt is less, at about NT$651.8m.

How Healthy Is Tri Ocean Textile's Balance Sheet?

The latest balance sheet data shows that Tri Ocean Textile had liabilities of NT$652.8m due within a year, and liabilities of NT$306.2m falling due after that. Offsetting these obligations, it had cash of NT$183.6m as well as receivables valued at NT$41.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$734.5m.

This is a mountain of leverage relative to its market capitalization of NT$890.6m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Tri Ocean Textile's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Tri Ocean Textile had a loss before interest and tax, and actually shrunk its revenue by 7.5%, to NT$385m. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Tri Ocean Textile produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable NT$182m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through NT$105m of cash over the last year. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Tri Ocean Textile you should be aware of, and 2 of them are a bit concerning.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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